Corporate governance and earnings management ... - CEREG
Corporate governance and earnings management ... - CEREG Corporate governance and earnings management ... - CEREG
This review of practices shows that temptation to keep goodwill unamortized in the balance sheet assets was still extremely strong in the United States throughout this phase, particularly between 1966 and 1972. After 1972, the dynamic doctrine took over, but the desire to use the actuarial approach remained at the back of the minds of a good many US businesses. This fact is important to fully understand the current situation. As far as pooling is concerned it must be noted that this method, although possible, was not a dominant one: “the purchase method was used to account for most business combinations” (Johnson & Petrone, 2001, p. 100). As Johnson notes, “many combinations that could have been accounted for by the pooling method were treated by the purchase method” (1999, p. 80). However, in the 1990s, there was a growing trend, especially for high technology companies that buy start-up businesses, to use pooling (Ayers, Lefanowicz & Robinson, 2000, p. 8-9; Johnson & Petrone, 2001, p. 100; Moehrle, Reynolds-Moehrle & Wallace, 2001, p. 247). This trend again indicated that the dynamic solution was not optimal for some (influent) enterprises especially those for whom goodwill represented very large proportions of assets and whose returns could be greatly impacted by the purchase method (Ayers, Lefanowicz & Robinson, 2000, p. 12-16). Some of them did not hesitate to “pay” to achieve pooling accounting (Robinson & Shane, 1990; Lys & Vincent, 1995; AAA - Financial Accounting Standards Committee, 1998, p. 88; AAA - Financial Accounting Standards Committee, 1999, p. 302). 3.4.2. France: third phase: the dynamic phase (1982 – 2005) After a period of more than sixty years’ “stagnation” in France, this phase brought sudden signs of a clear change in treatment of goodwill, and the dynamic approach became more popular. The first sign came in the third postwar official General Accounting Plan (Plan comptable général) of 1982. This reintroduced a goodwill amortization account, and stated that “intangible items making up goodwill do not necessarily benefit from legal protection that 50
confers a certain value” (CNC, 1982, p. 120). Thus a degree of incentive for amortization for accounting (rather than tax) purposes appeared. A survey of the treatment of goodwill in financial statements of the largest French groups between 1988 and 1998 shows that almost one half of these groups applied a systematic amortization of goodwill. This confirms a clear evolution towards the dynamic approach (Richard, Becom Simons & Secafi Alpha, 2000, p. 168). The move towards the dynamic approach was confirmed by the regulations governing consolidated accounts. Decree 67-236 on companies, amended following the law of 1985 on consolidated financial statements, ruled that unallocated goodwill arising on first consolidation “must be included in income over a period of amortization”, while regulation 99-02, paragraph 21130 of 1999, stated that “the amortization period must… reflect the assumptions used and objectives evidenced at the time of acquisition”. It is true that even regulation used the flexibility allowed by the seventh directive and introduced for French groups the possibility to write off goodwill against reserves. But, contrary to its German counterpart, French regulation stated that this write off could only happen “in exceptional circumstances duly justified in the note” (Decree of 23 March 1967 modified in 1986, § 248-3). Obviously, the French legislator wanted to restrain the use of the weakened static approach in favor of the dynamic view. Survey of practices of French groups provides evidence of the (forced) alignment of these groups on dynamic theses. Richard et al. (2000, p. 163-164) show that from 1987 to 1998, the systematic amortization of goodwill (over a longer and longer period, reaching more that 10 years in 92% of cases in 1998) became the rule for the 100 largest groups, whereas the write off against reserves concerned at the end of the period only 2 or 3 groups. The last issue deserving our interest is pooling. At the beginning of the period, the method is unknown in regulation as it is unknown in practice (Raffegeau, Dufils & Corre, 1986, p. 444) although its use became possible, under certain conditions, with the article 20 of the 51
- Page 1 and 2: The four phases of accounting regul
- Page 3 and 4: Introduction It was several decades
- Page 5 and 6: All the countries examined (with th
- Page 7 and 8: another theory to explain standard
- Page 9 and 10: supplementary contribution in this
- Page 11 and 12: 2.2. The bankers The bankers’ mai
- Page 13 and 14: 2.4. The capital markets and profes
- Page 15 and 16: produce dramatically different fina
- Page 17 and 18: It is thus important to find out wh
- Page 19 and 20: The second view, rather larger, con
- Page 21 and 22: was “not merely immaterial but al
- Page 23 and 24: The first German law concerning goo
- Page 25 and 26: Verley (1906, p. 39) considers Fren
- Page 27 and 28: (1897, p. 46). He arrives at the co
- Page 29 and 30: goodwill in the balance sheet at (u
- Page 31 and 32: It is also clear that supporters of
- Page 33 and 34: Clearly, the “retaining” techni
- Page 35 and 36: principally leaning on the fact tha
- Page 37 and 38: against equities and even to restri
- Page 39 and 40: “balance sheet approach” and sy
- Page 41 and 42: stock market capitalism. Tax doctri
- Page 43 and 44: The AIA took an even clearer stand
- Page 45 and 46: application of this “new” doctr
- Page 47 and 48: Arthur Andersen came to the defense
- Page 49: “advantageous” form (eliminatio
- Page 53 and 54: the part of companies (Brown, 1998,
- Page 55 and 56: condition that these rules will be
- Page 57 and 58: IASC and the FASB before 2001. That
- Page 59 and 60: lawyers, or bankers defending credi
- Page 61 and 62: accounting system has gone from a p
- Page 63 and 64: most popular means of funding the i
- Page 65 and 66: (due partly to the needs coming fro
- Page 67 and 68: 5. Conclusion Our article sets out
- Page 69 and 70: Bensadon, D. (2002). La consolidati
- Page 71 and 72: Greve, H. (1933). Die Behandlung de
- Page 73 and 74: Niehus, R. (1986). Protokoll der ö
- Page 75 and 76: Wolff, W. (1967). Accounting for in
- Page 77: Figure 2 - Summary: Four phases of
This review of practices shows that temptation to keep goodwill unamortized in the balance<br />
sheet assets was still extremely strong in the United States throughout this phase, particularly<br />
between 1966 <strong>and</strong> 1972. After 1972, the dynamic doctrine took over, but the desire to use the<br />
actuarial approach remained at the back of the minds of a good many US businesses. This fact<br />
is important to fully underst<strong>and</strong> the current situation.<br />
As far as pooling is concerned it must be noted that this method, although possible, was not<br />
a dominant one: “the purchase method was used to account for most business combinations”<br />
(Johnson & Petrone, 2001, p. 100). As Johnson notes, “many combinations that could have<br />
been accounted for by the pooling method were treated by the purchase method” (1999, p.<br />
80). However, in the 1990s, there was a growing trend, especially for high technology<br />
companies that buy start-up businesses, to use pooling (Ayers, Lefanowicz & Robinson, 2000,<br />
p. 8-9; Johnson & Petrone, 2001, p. 100; Moehrle, Reynolds-Moehrle & Wallace, 2001, p.<br />
247). This trend again indicated that the dynamic solution was not optimal for some (influent)<br />
enterprises especially those for whom goodwill represented very large proportions of assets<br />
<strong>and</strong> whose returns could be greatly impacted by the purchase method (Ayers, Lefanowicz &<br />
Robinson, 2000, p. 12-16). Some of them did not hesitate to “pay” to achieve pooling<br />
accounting (Robinson & Shane, 1990; Lys & Vincent, 1995; AAA - Financial Accounting<br />
St<strong>and</strong>ards Committee, 1998, p. 88; AAA - Financial Accounting St<strong>and</strong>ards Committee, 1999,<br />
p. 302).<br />
3.4.2. France: third phase: the dynamic phase (1982 – 2005)<br />
After a period of more than sixty years’ “stagnation” in France, this phase brought sudden<br />
signs of a clear change in treatment of goodwill, <strong>and</strong> the dynamic approach became more<br />
popular.<br />
The first sign came in the third postwar official General Accounting Plan (Plan comptable<br />
général) of 1982. This reintroduced a goodwill amortization account, <strong>and</strong> stated that<br />
“intangible items making up goodwill do not necessarily benefit from legal protection that<br />
50
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